briefing on solvency ii

1Solvency II – Analysts’ briefing

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Briefing on Solvency II

London, 30 November 2015


Agenda

Overview and implementation 2

Impact on Munich Re

Solvency II balance sheet and own funds 11

Solvency capital requirement 26

Solvency II capitalisation ratio and target capitalisation 33

Impact on the insurance industry 39


Munich Re well prepared for the introduction of Solvency II and business opportunities it presents

Munich Re welcomes Solvency II standards for risk-based capitalisation

Solvency II framework

Changing capital requirements through final calibration

Capitalisation remains very strong –SII ratio (end of 2014) has even increased

Risk-based supervision Certified full internal model deeply embedded in risk and business management – Full Groupinternal model approved without terms & conditions

Business opportunities for reinsurers, driver of product innovation

Market-leader position in structuring complex tailor-made solutions

Insurers’ business models are adequately reflected

Focus on profitable underwriting and liability-driven investments – well diversified risk profile clearly recognised

High degree of transparency Extensive reporting to the regulator, the capital markets and the public

Uniform regulatory framework enhances comparability across the industry

Active participation in efforts to harmonise Solvency II terminology

Overview and implementation


The road to Solvency II on the final straight

Solvency II regime becomes fully applicable on 1 January 2016

Preparatory phase 2014–2015 successfully concluded

Level 1, 2 and 3 documents finalised and mainly approved

Currently being transposed into national law

Further regulatory requirements (ComFrame, HLA, ICS) being prepared

Review of ultimate forward rate in 2016

Review of standard formula by 2018

Annual review of long-term-guarantee measures

Review

National interpretations (e.g. audit review of solvency position)

Equivalence not yet decided for several countries

Application and approval of dynamic volatility adjustment in internal models

Issues outstanding/under discussion

New regulatory framework implemented – ongoing developments not expected to significantly affect Munich Re’s Solvency II capitalisation ratio

Overview and implementation – Current status of Solvency II


Holistic, principle-based approach of Solvency II has been followed by Munich Re

Risk management deeply rooted in Munich Re

Key functions implemented Internal policies finalised ORSA1 embedded in business

planning process since 2012 Strong operational and

security & continuity management (e.g. Internal Control System)

Group internal model successfully used since 2002

Model reflects diversified business model of global reinsurance – standard formula primarily developed for primary insurance

Full internal model includes operational risk

Improved Solvency II capitalisation ratio underlines prudent model calibration

Reporting to the public Risk report (included

in Annual Report) Solvency II reporting

as from 2017: Solvency & Financial

Condition Report Quantitative Reporting

Templates (QRTs)Reporting to the regulator Regular Supervisory

Report/Internal Risk Report Additional QRTs

(quarterly/annual) ORSA Report

Quantitative requirements Qualitative requirements Disclosure1 2 3

Three pillars of Solvency II deeply entrenched in Munich Re’s management approach

1 ORSA: Own risk and solvency assessment.

Overview and implementation – Status of Solvency II implementation at Munich Re


Extensive review of internal model by BaFin and other European regulators ensures high quality of model results

Overview and implementation – Internal model application process

Approval process started well after model results were used in relevant management processes at Munich Re

2009 2010 2011 2012 2013 2014 2015

Approval of New Re‘sinternal model by FINMA1 in Switzerland

Internal model recognised by S&P via M-Factor

“Trial” applicationsubmitted to BaFin2

Official applicationsubmitted to BaFinin May 2015

Full Groupinternal modelapproved withoutterms & conditionsPre-application process

Review of all individual risk categories / on-site visits by regulators / written feedback including follow-up

Preparation of application packageFull package consisting of approximately 15,000 pages

Informal model change phaseNo further BaFin review for models already fulfilling all requirements

1 Swiss regulator. 2 German regulator.


Munich Re Group’s internal model captures all relevant risks globally

Application of Munich Re Group’s internal model

Efficient allocation of capital within Munich Re Group remains key under Solvency II

Overview and implementation – Internal model application process

Group internal model Internal model applied to legal entities

Internal model covers all risks of Munich Re Group (“full internal model”)

Use of internal models at entity level for selected companies in Europe (MR-AG, MR of Malta, DKV, ERGO Property-casualty, ERGO Direkt and New Re according to SST1)

Use of standard model for other European legal entities

Majority of capital is in legal entities using internal models

1 Swiss Solvency Test.


Main features of application of Solvency II methodology at Munich Re

Munich Re Group’s own funds and SCR based on consolidated accounts – no use of lower, statutory capital requirements via deduction and aggregation method (e.g. US subsidiaries)

High quality of Munich Re Group’s own funds SCR based on full internal model Conservative approach adopted (e.g. for loss-absorbing capacity of deferred taxes, treatment of

government bonds) Profit and loss attribution (reflecting changes in own funds) used for validation of internal model and

value-based management

Straight-forward implementation reflects high maturity of Munich Re’s internal model

Overview and implementation – Application of Solvency II methodology at Munich Re

Own funds (OF) / Solvency capital requirement (SCR)

Application of transitionals and LTG measures

Currently no optional long-term-guarantee measures considered (e.g. transitionals, volatility adjustment (VA), matching adjustment (MA)) – final decision to be taken at year-end 2015

Grandfathering

Grandfathering partly used for subordinated liabilities


Illustration of long-term-guarantee measures

2012 2013 2014

Credit risk adjustment (CRA) –20 –10 –10

Volatility adjustment (VA) 40 20 18

Adjustments

1 End of year.

Possible reduction of UFR with very limited impact on Munich Re’s SII ratio due to diversity of business models within Munich Re Group

EIOPA risk-free interest rates Swap rates adjusted for credit risk (CRA) up to last

liquid point (LLP)

Extrapolation: Risk-free interest rates extrapolated to ultimate forward rate (UFR) starting from LLP

Euro (currentexpectation)

LLP Convergence UFR20 years 40 years 4.2%

EIOPA risk-free interest rates applied without optional elements

bps1

Impact of ultimate forward rate Actual discount rate based on risk-free spot rates

UFR affects risk-free spot rates only from LLP on

Potential changes in UFR expected to have very limited effect

Application at Munich Re

Overview and implementation – Application of Solvency II methodology at Munich Re

0 10 20 30 40 50 60 70

Rate

MaturityLLP

Observeddata

With MAWith VASwap rates plus extrapolationEIOPA risk-free interest rates

Extrapolation


Positive effects on solvency ratio from transposition into Solvency II world

Impact on eligible own funds

Impact on solvency capital

requirementFungibility and transferability restrictionsERGO Life/Health Surplus funds (‘free RfB’)Application of EIOPA risk-free interest ratesLoss-absorbing capacity of deferred taxes

Capitalisation of Munich Re remains very strong under Solvency II regime

Overview and implementation – Summary of main changes

SII ratio

Solvencycapital

requirement

Economicrisk

capital/1.75

Eligibleown

funds

Availablefinancial

ressources

=


Agenda


Impact on Munich Re

Solvency II balance sheet and own funds

Solvency capital requirement

Solvency II capitalisation ratio and target capitalisation

Impact on the insurance industry


From top-down AFR approach to bottom-up own funds calculation

Calculation of own funds based on full Solvency II balance sheet

Solvency II balance sheet and own funds – SII calculation scheme

AFRIFRS equity

Old world – Top-down approach

AFR derived from IFRS equity via economic adjustments

New world (SII) – Bottom-up approach

Eligible own funds derived from SII excess of assets over liabilities in a very granular process

SII balance sheet

Eligible own

funds

Excess of assets over

liabilities

=


Consistent methodology for the calculation and disclosure of the SII ratio

Required capital

Components and quality of own funds highly complex but transparent

Clearly defined system for calculation of eligible own funds New concept of tiering requires quality assessment of own funds

Solvency II balance sheet and own funds – SII calculation scheme

Available capital

Solvency IIcapitalisation ratio

1 Own funds. 2 E.g. foreseeable dividends and distributions, own shares, ring-fenced funds, matching adjustment portfolio. 3 Non-available own funds items (e.g. non available surplus funds) and deduction of own funds from participations in other financial

sectors. 4 Off-balance sheet items that can be called up to absorb losses, e.g. letters of credit (subject to supervisory approval). 5 EOF/SCR for other financial sectors. 6 MR Group reports SII ratio including other financial sectors according to aligned ‘SII capital

market disclosure concept’.

EOFSCR

SII ratio6

=

SII balance sheet audited

Eligible own

funds(EOF)

Available own funds

(AvOF)

Assetsin SII

balancesheet

Liabilitiesin SII balance

sheet

Subord. liabilities

with OF1

character

Excess ofassets over

liabilities(EAoL)

=

AncillaryOF4

(AOF)

Basic own

funds(BOF)

Solo2

deductions

Group3

deductions

Other items approved

EAoLafter

deductions

Subord. liabilities

with OF character

Tier 2

Tier 1unrestricted

Tier 1 restricted

Tier 3

Tier 2

Tier 1unrestricted

Tier 1restricted

Tier 3

Solvency capital

require-ment(SCR)

5 5C

lass

ifica

tion

Lim

its


Reconciliation of BOF to EOF: SII methodology less complex at Munich Re Group

No ancillary own funds Basic own funds equal Available own funds

No tiering effects Available own funds equal Eligible own funds1

No “ring-fenced funds” or “matching adjustment portfolio”

No “other items approved” by supervisory authorities

Munich Re Group’s own funds have a straight-forward structure

Solvency II balance sheet and own funds – Own funds structure at Munich Re Group

1 For ‘SII ratio including other financial sectors’, EOF need to be increased by EOF related to other financial sectors.

Own funds as at 31 December 2014


Continuity in capital resources despite new methodology

Solvency II balance sheet and own funds – Reconciliation AFR to own funds

38.8

–0.3

2.0

–1.7

–

–0.8

38.0

0.0

0.2

38.2

Reconciliation AFR to own funds as at 31 December 2014 €bn

Available financial resources (AFR)

Foreseeable share buy-backs2

Surplus funds (‘free RfB’)

Other valuation adjustments (AFR vs. SII)

Optional long-term-guarantee measures

Restrictions3

SII basic own funds (BOF)

Restrictions from tiering

Own funds for FCIIF and IORP4

SII eligible own funds (EOF)

1 ~€2bn after tax. 2 Outstanding from share buy-back 2014/2015. 3 Deduction of non-available own funds items of –€0.5bn (e.g. non available surplus funds) and deduction of own funds from participations in other financial sectors. 4 Own funds for other financial sectors (financial, credit institutions and investment firms and institutions for occupational retirement provision).

CommentsRecognition of surplus funds and other valuation adjustments Various valuation differences between

SII methodology and former AFR approach pretty much level out (including recognition of surplus funds); management reserve margin RI P-C1

included in the AFR but not in SII own funds

Optional long-term-guarantee measures Currently not consideredRestrictions Non-available own funds items formerly

recognised in higher capital requirements

Restrictions from tiering High quality of SII capital resources

allows full consideration of BOF as EOF


Main differences between Solvency II andIFRS balance sheets

Solvency II balance sheet and own funds – SII balance sheet

Solvency II balance sheet is a full fair-value balance sheet

Amortised cost

Amortised cost

Amortised cost

Nominal value(in exceptional cases discounted values)

Treated as liabilities

Amortised cost

Goodwill and intangible assets

Property, loans

Subordinated liabilities

Technical provisions

Surplus funds (‘free RfB‘)

Other assets / other liabilities

No recognition,i.e. valued at zero

Fair value

Fair value

Technical provision (discounted)= Best estimate + Risk margin

Treated as own funds

Mostly fair value

Balance sheet item SII IFRS


From IFRS to Solvency II excess of assets over liabilities

€bn Assets/Liabilities (clustered) as at 31.12.2014 SII IFRS Comments

Goodwill and intangible assets1 0.0 3.6 –3.6 No recognition of goodwill and intangible assets in SII –3.6

Investments including loans, deposits with cedants, cash 243.2 230.3 12.9

Full fair values in SII lead to higher balances

6.1

Subordinated liabilities –5.0 –4.4 –0.6

Net deferred tax assets / liabilities1 –3.6 –1.9 –1.7 Different valuation methods produce

difference in deferred taxes

Other assets and other liabilities1 –6.4 –8.8 2.4 For example discounting effects in SII

Technical accounts1

without surplus funds –193.5 –186.6 –6.9SII: Risk margin and additional policyholder participation due to higher fair values of assets are partly offset by reserve discounting

Surplus funds 0.0 –2.0 2.0 Surplus funds (‘free RfB’) are own funds in SII and are therefore not classified as liabilities 2.0

SII EAoL versus IFRS equity 34.8 30.3 4.5 +4.5

Solvency II balance sheet and own funds – Comparison SII and IFRS balance sheet

1 IFRS balances reflect reclassifications in order to facilitate comparison to IFRS equity / Eligible own funds reconciliation.

Fair values, risk margin and surplus funds are the main differences


IFRS equity

Goodwill and intangible assets

Valuation adjustments

Surplus funds (‘free RfB’)

Excess of assets over liabilities

Subordinated liabilitiesForeseeable dividends,

distributions and own shares1

Restrictions2

Basic own funds

Ancillary own funds

Restrictions from tiering

Own funds for FCIIF and IORP3

Eligible own funds

30.3

–3.6

6.1

2.0

34.8

5.0

–1.0

–0.8

38.0

0.0

0.0

0.2

38.2

Reconciliation of IFRS equity with eligible own funds includes both well-known and new elements

Solvency II balance sheet and own funds – Reconciliation of IFRS equity to own funds

€bnReconciliation of IFRS equity to eligible own funds as at 31 December 2014;Structure according to ‘SII capital market disclosure concept’ defined by Allianz, Talanx and Munich Re

+4.5

1 Foreseeable distributions from share buy-backs (–€0.3bn) and own shares (–€0.7bn). 2 Deduction of non-available own funds items of –€0.5bn (e.g. non-available surplus funds) and deduction of own funds from participations in other financial sectors. 3 Own funds for other financial sectors (financial, credit institutions and investment firms and institutions for occupational retirement provision).


EOF

Tier 2

Tier 1unrestricted

Tier 1restricted

Tier 3

SCR

SCR limits do not lead to restrictions from tiering –89% tier 1 capital

€bn

Tier 1: 4% restricted (1.5)

Undated subordinated liability1

Tier 1: 85%unrestricted(32.5)

Tier 2: 9%(3.5)

Dated subordinatedliabilities2

TOTAL€38.2bn

Solvency II balance sheet and own funds – Tiering of group own funds

EOF 31.12.2014SCR limits

1 MR AG undated subordinated liability nominal €1,349m according to MR’s own assessment accounted for under transitional arrangements – “grandfathering”. 2 Mainly MR AG dated subordinated liabilities nominal €900m, €1,000m and £450m according to MR’s own assessment; nominal £300m according to MR’s own assessment accounted for under transitional arrangements – “grandfathering”.

High quality of capital provides Munich Re with flexibility and capacity

T1 r 20% T1

T1 50% SCR

T3 15% SCR

T1ufully eligible! T1r, T2, T3

subject to limits !

(T2+T1rcut)+T3 50% SCR

Tier 3: 2%(0.7)Net deferred tax asset


Profit and loss attribution explains change in Solvency II eligible own funds – Focus on economic earnings

Expected return existing businessRisk-free interest on economic capital resources and unwind of risk margin

New business value Value of new business written in reporting period, valued at end of period, after capital costs

Operating variances existing business Experience variances and assumption changes; reflect positive or negative deviations from prior year’s business valuation

Other operating variances Model changes, etc.

Economic effects Changes in economic capital resources from development of capital market parameters on assets and liabilities

Other non-operating earningsOverall tax effect and other items

Solvency II balance sheet and own funds – Concept of economic earnings

Other non-operating earnings

Economic effects

Operating variances existing business

New business value

Operating economic earnings

Expected returnexisting business

Other operating variances

Total economic earnings

Note: All operating economic earnings components as well as economic effects are reported before tax.


€bn

Group economic earnings split into three major components

Group economic earnings 2014

Economic earnings supported by sound technical result and good asset-liability management

Operating economic earnings 1.5Pleasing new business value and existing business development especially in RI Life and RI Property-Casualty; model enhancements in RI Life and ERGO Life operations with negative effect

Economic effects 2.2

Interest rate –0.9 Positive FX effects and gains in equities mainly in RI are partly offset by overall negative impact of lower interest rates (negative ERGO effect exceeded positive impact for RI and MH)

Equity 0.4

Credit 0.3

Currency 1.8

Other1 0.6

Other non-operating earnings –0.6 Overall tax effect and other items

Total economic earnings 3.2

1 Primarily related to illiquid investments: property, infrastructure, forestry, hedge funds, private equity.

Solvency II balance sheet and own funds – Movement analysis profit and loss attribution


Profit and loss attribution provides consistent reporting of economic performance across business units

Munich Re (Group) FY 2014€bn RI

LifeRI

P-C

ERGO Life/Health

Germany

ERGO P-C

GermanyERGO

Intl.MunichHealth

MR(Group)

Operating economic earnings 0.2 1.6 –0.4 0.2 –0.1 0.1 1.5

Expected return existing business 0.1 0.3 0.1 0.0 0.1 0.0 0.7

New business value 0.6 0.5 0.2 0.2 0.0 0.1 1.5

Operating variances existing business 0.2 0.8 –0.3 0.0 –0.1 0.0 0.5

Other operating variances –0.7 0.0 –0.5 0.0 0.0 0.0 –1.2

Economic effects 1.0 2.3 –1.3 0.3 –0.2 0.1 2.2

Other non-operating earnings –0.2 0.1 –0.1 –0.2 –0.1 0.0 –0.6

Total economic earnings 1.1 3.9 –1.8 0.3 –0.4 0.2 3.2

Capital measures –2.6

Changes in other own funds items –

Change in SII EOF 0.6

Solvency II balance sheet and own funds – Profit and loss attribution by business unit

Former MCEV concept now integrated in group-wide SII-based performance metric


Economic earnings Reinsurance LifeSolvency II balance sheet and own funds – Profit and loss attribution by business unit

Pleasing new business value generation, but negative effects from model updates

Overall, the FY 2014 new business value fits well into Munich Re’s long and successful track record [cf. MCEV report, page 8]

Operating variances include experience variances somewhat higher than expected reflecting aggregates in mortality and morbidity [cf. Analysts‘ conference presentation 2015, p. 71]. Assumption changes have been updated to reflect both past evidence and expected future experience [cf. MCEV report, page 9]

Other operating variances allow for model changes resulting from the continuous revision of valuation models [cf. MCEV report, page 9]

Main sources of operating economic earnings

Munich Re (Group) FY 2014€bn

RI Life

Operating economic earnings 0.2

Expected return existing business 0.1

New business value 0.6

Operating variances existing business 0.2

Other operating variances –0.7


Other non-operating earnings –0.2



Economic earnings Reinsurance Property-CasualtySolvency II balance sheet and own funds – Profit and loss attribution by business unit

Favourable developments in large losses and reserve releases slightly above expectation

Operating economic earnings driven by good underlying profitability. Favourable major loss development vs. expectation contributes €0.8bn [cf. Analysts‘ conference presentation 2015, page 6; 69; 102]

Unchanged reserving discipline reflected in new business value usually facilitates reserve releases of ~4% without challenging the prudency level; corresponding NBV adjusted for prudency margin €1.1bn [cf. Analysts‘ conference presentation 2015, p. 19]. Besides, new business value benefits from major losses below expectation for current development year [cf. Analysts‘ conference presentation 2015, page 102]

Operating variances contain the effect of favourableactual vs. expected comparison which allow ultimate reductions for prior years (€0.9bn adjusted for commission effects) [cf. Analysts‘ conference presentation 2015, page 19; 21]



RI P-C

Operating economic earnings 1.6

Expected return existing business 0.3

New business value 0.5

Operating variances existing business 0.8

Other operating variances 0.0


Other non-operating earnings 0.1



Economic earnings ERGOSolvency II balance sheet and own funds – Profit and loss attribution by business unit

Challenges from low-yield environment reflected in ERGO Life/Health Germany, while property-casualty business remains profitable

NBV Life/Health lower than last year [cf. MCEV report, page 17] while P-C‘s NBV remained stable

Operating variances existing business: especially German life primary business impacted negatively by various effects, e.g. with regard to profit sharing, lapses and expenses, with variances in profit sharing as main driver among these experience variances. International life primary business produced negative assumption changes [cf. MCEV report, page 15]

Other operating variances negative as a result of various model refinements predominantly in German life primary business [cf. MCEV report, page 15]



ERGO Life/Health

Germany

ERGO P-C

GermanyERGO

Intl.

Operating economic earnings –0.4 0.2 –0.1

Expected return existing business 0.1 0.0 0.1

New business value 0.2 0.2 0.0

Operating variances existing business –0.3 0.0 –0.1

Other operating variances –0.5 0.0 0.0

Economic effects –1.3 0.3 –0.2

Other non-operating earnings –0.1 –0.2 –0.1

Total economic earnings –1.8 0.3 –0.4


Agenda


Impact on Munich Re






Munich Re’s long-standing internal risk model was already substantially compliant with SII requirements

Internal risk model well integrated into management and business decisions

Internal model developed in recent decades as a foundation for value-based management The model reflects risks on both the asset and the liability side of the balance sheet on an economic

valuation basis Internal model covers all risk categories (e.g. including operational risk) within entire Munich Re Group on

the basis of consolidated accounts (“full internal model”) Internal model recognised by S&P in determining the target rating capital (“M-factor”).

Munich Re’s Enterprise Risk Management is assessed as “very strong” by S&P, the highest level in the industry.

Munich Re’s internal model originally developed for internal corporate management

Final adoption of internal model when entering Solvency II

No major changes in the SCR or internal management due to the following modifications: Use of EIOPA risk-free interest rates Consideration of fungibility and transferability restrictions Treatment of loss-absorbing capacity of deferred taxes

Solvency capital requirements – Integration in business decisions


Transition from swap rates to EIOPA risk-free interest rates

Life and Health

Market

Implementation of SII rules on fungibility and transferability (Group)

Market

Diversification

Transition to pre-tax disclosure of risk categories and introduction of loss-absorbing capacity of deferred taxes

Life and Health

Market

Credit

Tax

New risk disclosure mirrors Solvency II model characteristics

Solvency capital requirements – Reconciliation as at 31.12.2014

Main drivers for differences

1 Credit (re)insurance included. 2 Default and migration risk.3 Capital requirements for other financial sectors, e.g. institutions for occupational retirement provisions.

Impact on SII-SCR€bn

Risk category ERC ERC/1.75 SII-SCRProp.Casualty1 10.0 5.7 5.7Life and Health 9.0 5.1 4.8Market 12.5 7.1 8.8Credit2 6.7 3.8 4.6Operational risk 1.7 1.0 1.0Other3 – – 0.2

Simple sum 39.9 22.7 25.1Diversification –13.0 –7.3 –9.1

Tax – – –2.2

Total risk capital 26.9 15.4 13.8

Risk capital – Breakdown by risk category

The SII-SCR numbers are based on the approved internal model. The SCR calculation is based on VaR99.5%.

Moderate decrease of disclosed SCR, mainly driven by consideration of loss- absorbing capacity of deferred taxes


Breakdown of SII-SCR by business field

€bn

Risk category Group RI ERGO MH Div.ERC/1.75

SII-SCR

SII-SCR

SII-SCR

SII-SCR

SII-SCR

Prop.-Casualty 5.7 5.7 5.6 0.3 0.0 –0.2

Life and Health 5.1 4.8 3.6 2.1 0.3 –1.2

Market 7.1 8.8 5.5 5.0 0.0 –1.7

Credit 3.8 4.6 2.8 1.9 0.0 –0.1

Operational risk 1.0 1.0 0.8 0.4 0.1 –0.3

Other – 0.2 – – – –

Simple sum 22.7 25.1 18.3 9.7 0.4 –3.5

Diversification –7.3 –9.1 –7.1 –2.6 –0.1 –

Tax –2.2 –1.9 –0.5 0.0 –

Total SCR 15.4 13.8 9.3 6.6 0.3 –2.5

€bnRisk capital – Breakdown by risk category Reconciliation as at 31.12.2014

15.4

+0.0

–0.3

+1.7

+0.8

+0.0

+0.2

–1.8

–2.2

13.8

ERC/1.75

Property-Casualty

Life andHealth

Market

Credit

Op Risk

Other

Diversifi-cation

Tax

SII-SCR

Solvency capital requirements – Reconciliation as at 31.12.2014


Munich Re benefits from strong diversification between natural catastrophe risks

1 Exposures relate to the full year, e.g. 2015 relates to the period from 1.1.2015 to 31.12.2015.2 Natural catastrophes, man-made (including terrorism and casualty accumulation) and major single losses.

AggVaR (return period 200 years)(pre-tax)

Munich Re (Group) – Nat cat exposure (net of retrocession)1

Earthquake Los Angeles

Atlantic Hurricane

Top nat cat exposures

Storm Europe

0

1

2

3

4

2014 2015 2014 2015 2014 2015Earthquake Los Angeles

AtlanticHurricane

Storm Europe

5.7 5.7

ERC/1.75 SII-SCR

SCR Property-Casualty €bn€bn

Basic lossesMajor losses2

DiversificationTotal

3.2 5.1 –2.6

5.7

Solvency capital requirements – Breakdown by risk category as at 31.12.2014: Property-Casualty

No changes in Property-Casualty risk module


Final model adoptions:

Treatment of Surplus Funds

Consistent use of Risk Margin

Refined modelling of the “ZZR” for German life primary business

Use of EIOPA risk-free interest rates

“Pre-tax” disclosure

ERGO Life/Health

Reinsurance Life

Model used in Q4 2014 was already Solvency II-compliant

Implementation of EIOPA risk-free interest rates has a modest effect on overall life reinsurance SCR

5.1

4.8

ERC/1.75 SII-SCR

Decrease in Life/Health SCR mainly driven by transition from swap rates to EIOPA risk-free interest rates

Solvency capital requirements – Breakdown by risk category as at 31.12.2014: Life/Health

Longevity

Mortality

Morbidity

Health

2.4

3.0

2.5

0.5

3.1

2.9

2.4

0.5SII-SCRERC/1.75

€bnSCR Life/Health Impact on SII-SCR


Risk category Group RI/MH ERGO Div. ExplanationYear-end 2014 €bn

ERC/1.75

SII-SCR

SII-SCR

SII-SCR

SII-SCR

Equity 3.3 3.4 2.6 0.8 ±0.0 Minor increase due to conversion to pre-tax calculation

General interest rate 3.0 3.8 1.8 3.9 –1.9 Transition to risk margin and conversion to pre-tax calculation partially offset by application of EIOPA risk-free interest ratesCredit spread 3.0 3.1 1.7 2.0 –0.6

Real estate 1.3 1.3 0.8 0.5 ±0.0

Currency 1.5 3.5 3.4 0.2 –0.1 Implementation of SII fungibility and transferability rules

Simple sum 12.1 15.1 10.3 7.4 –2.6

Diversification –5.0 –6.3 –4.8 –2.4 – Improved diversification due to SCR increase

Total SCR 7.1 8.8 5.5 5.0 –1.7

Market risk categories affected differently by model adoptions

Solvency capital requirements – Breakdown by risk category as at 31.12.2014: Market

Pre-tax disclosure and conservative treatment of SII availability restrictions lead to increases in different risk categories


Agenda


Impact on Munich Re






Medium

Low HighHGB

flexibility

Capitalisation in the Solvency II regime remains very comfortable …

Sound capitalisation according to all metrics

… enabling ongoing active capital management

SII ratio well over 220%

Substantial capital buffer supporting AA rating

German GAAP earnings largely protected by equalisation reserve

€bn

2.4

1.51.1

1.6

2.72.3

2010 2011 2012 2013 2014 2015e

Attractive shareholder participation1

Dividend

Sharebuy-back

Cash yield2 11.2% 7.8% 5.4% 6.0% 9.6% ~7%

Almost €20bn returned to shareholders since 2006

Eligible own funds of high quality

Solvency II capitalisation ratio and target capitalisation – Capital management

Medium

Low HighQuality of

Capital

175%

140% 220%Internal model

Sub-optimal

Abovetarget

AA

A AAARating

agencies

1 Cash-flow view. 2 Total payout (dividend and buy-back) divided by average market capitalisation.


€bn

Reconciliation of economic earnings to German GAAP (HGB) result

3.2 –0.3

3.20.6 6.8 –3.6

3.2 –0.5 0.3 3.00.5 –1.4

2.0

EconomicEarnings 2014

Effect 1 Effect 2 Effect 3 Totalrecognisedincome andexpenses

(IFRS)

Income andexpenses

recogniseddirectly in

equity

IFRS Result2014

Distributableearnings31.12.2016

Div.-proposalFY 2016

(to be paid04/2017)

Net income(Plan2017)

Distributableearnings31.12.2017

IFRS total recognised income and expenses

2014

Difference between

IFRS results of

subsidiaries and their dividend

payments to Munich

Re AG

Other accounting differences

HGB result before equali-sation

reserves

Change of

equali-sation

reserves

HGB result 2014

Tax reducing effect2

of equali-sation

reserves

Economic earnings

2014

Change in goodwill

and intangible assets1

Change in valuation

adjustments1

Change in surplus funds1

1 Based on rough estimates. 2 Assuming a tax rate of 33% for Munich Re AG.

Solvency II capitalisation ratio and target capitalisation – Reconciliation

IFRS result 2014

Income and

expenses recognised

directly in IFRS equity

Please refer to slide 18

Reconciliation of economic earnings to HGB result


Eligible own funds


SII ratio2

Significant improvement in Munich Re’s SII ratio

€bn

38.2

13.8

277%

Pro-forma Q3 2015 SII ratio expected to be around 260%

Available financial resources1

Economic risk capital

Ratio based on AFR and ERC

37.2

26.9

Available financial resources1

SCR = ERC/1.75

Ratio based on AFR and ERC/1.75

37.2

15.4

242%

1 After dividend of ~€1.3bn announced for 2014 to be paid in April 2015 and outstanding share buy-backs of ~€0.3bn.2 Ratio after dividend of ~€1.3bn for 2014 to be paid in April 2015: 268%.

138%

Solvency II capitalisation ratio and target capitalisation – SII ratio as at 31.12.2014

€bn €bn


220%

175%

140%

100%

Despite more favorable ratio: Target capitalisation range kept stable because of higher confidence level

SII ratioMunich Re actions

Capital repatriation Increased risk-taking Holding excess capital to meet

external constraints

>220%Above target capitalisation

Tolerate (management decision) or take if necessary management action

(e.g. risk transfer, scaling-down of activities; raising of hybrid capital)

175% – 220%Target capitalisation

140% – 175%Below target capitalisation

<140%: Sub-optimum capitalisation Take risk management action (e.g.

risk transfer, scaling-down of activities; raising of hybrid capital) or

in exceptional cases tolerate situation (management decision)

2008 2009 2010 2011 2012 2013 2014

%

Optimum level of capitalisation

Ratio based on AFR and ERC/1.75

SII ratio277%

242%

Solvency II capitalisation ratio and target capitalisation – Target Capitalisation


Ratio as at31.12.14Interest rate+100bpsInterest rate–100bpsSpread+100bpsEquity markets +30%Equity markets –30%

FX –10%

AtlanticHurricane1

SII ratio – Sensitivity

277

322

235

239

290

265

273

260

%

Sensitivities of SII ratio …

… underline robustness of capital position

220175

Solvency II capitalisation ratio and target capitalisation – Sensitivities

1 Based on 200 year event.


Agenda


Impact on Munich Re






Overarching impact of Solvency II: Focus on capital management

Capital management will become a multi-faceted exercise under Solvency II and be a core factor in strategic discussions in areas such as new product development

Development of robust ALM techniques vital for companies to prosper under Solvency II

Integration of Solvency II interest-rate adjustments1

a further challenge Trade-off between hunt for

yield and keeping capital requirements under control, especially in Life business

Removal of artificial investment restrictions allows greater freedom but “prudent person principle” requires close alignment of investments with policyholder interests

Solvency II another highly complex and volatile dimension in addition to local GAAP, tax, rating and IFRS (as applicable)

Impact of business decisions immediately visible through economic measurement approach under Solvency II

Differences in underlying principles may lead to conflicting management impulses – in extreme cases “capital eats strategy”

Capital requirements integral part of product development, profitability assessment and monitoring

Companies will be nudged towards risk and value-based management

However, customers and policyholders expect insurance companies to offer products which satisfy their needs / wishes, e.g. long-term-guarantee products

Increasing number of capital management dimensions

Strong impact of asset-liability management (ALM)

Trade-off between customer needs and capital impact

1 2 3


1 Credit adjustment, volatility adjustment, matching adjustment, interest-rate transitional (as applicable).


Solvency II plays to Munich Re’s strengths

Observations …

Evolution of reinsurance inspired by Solvency II and similar regimes

Reinsurance on par with traditional capital management instruments (e.g. equity, debt)

Knowledge of individual client situation key to developing tailor-made solutions

World-wide move towards risk-based supervision similar to Solvency II (e.g. China, Mexico)

… and implications

Reinsurance will be used as an additional capital management instrument

Analytical capabilities needed to analyse clients and evaluate solutions

Experience gained in Europe can be transferred to other countries – advantage for global players

Illustrative


SCR relief

Co-creation / strategic partnerships

KPI optimisation

Know yourclient

Short-term Medium-term Long-term


€Capital strength

Number of reinsurers

#1 #2 #3 #4 #5

AAA 8 7 6 6 6

AA 19 16 15 14 14

A 42 35 32 31 30

BBB 92 77 71 68 66

BB 340 284 263 252 245

B 625 523 483 462 448

Impact on competitiveness: Solvency II fully crystallising the value of the reinsurance business model

Diversification of reinsurers is higher due to number of individual risks geographical spread (global business model) product and line of business mix

Explicit consideration of reinsurance credit risk by insurers through counterparty default risk module A better-rated single reinsurer always produces a

lower counterparty default risk than a panel of lower-rated reinsurers

Risk transfer – illustrative

Before risktransfer

After risktransfer

Primary insurer's portfolio

Reinsurer's portfolio

Risk capital€m

Gross 130

Net60

70

Capital relief

<70

Additional risk capital

Capital requirement

Risk transfer from insurer to well-diversified reinsurer beneficial for both

Financial strength of reinsurer to provide a clearer competitive edge

Counterparty default by rating and no. of reinsurers1

1 Based on loss given default of €1,250: total reinsurance recoverable of €1,000, total risk-mitigating effect of €500, no collateral considered.

RISK TRANS-FORMATION



Solvency II as an additional driver in some of Munich Re’s strategic business initiatives

New(re-)insurance products

New business models

New risk-related services

New clients and demands

Key development

areas

Cyber risks Energy and technology (e.g.

technical performance guarantees) Non-damage BI Weather and climate Project cost insurance Product design in Life and Health

based on enhanced data analytics

Automation and digitalisation of processes (e.g. automated underwriting platform) White labelling Risk-sharing with pension funds

Consultancy (e.g. Motor and Property Consulting services) Project risk rating Virtual simulation of e.g. construction Predictive and preventive services

Corporate finance/capital management solutions(e.g. Capital Partners) Public-sector business development Sharing economy/mobility

~ €400m1 premium generated by innovative products


1 Approximation – not fully comparable with IFRS figures.


GlossaryBackup

AAOF Ancillary own funds. Off-balance-sheet items that can be called upon to absorb losses, e.g. letters of credit

(subject to supervisory approval).

BBOF Basic own funds. Own funds consisting of EAoL after deductions, subordinated liabilities treated as own funds

character and other items approved.

CCapital measures Changes in own funds, for example due to dividends, shares bought back, hybrid capital raised or repaid or changes in

foreseeable capital distributions (dividends and share buy-backs).

Change in other own funds items

Part of PLA, e.g. change in non-available Own funds items, change in restrictions from tiering.

ComFrame Common Framework for the Supervision of Internationally Active Insurance Groups: ComFrame is a set of international supervisory requirements developed by IAIS (International Association of Insurance Supervisors) focusing on the effective group-wide supervision of internationally active insurance groups (IAIGs).

DDiversification The diversification measures the balancing effects between different risk sources within a portfolio, taking account of

dependencies which assess the extent to which events could occur simultaneously.

Dynamic volatility adjustments The level of the volatility adjustment changes during calculating the capital requirements. In scenarios where the credit spreads widen/narrow, the basic risk-free interest rates are increased/decreased reducing the overall spread risk. The dynamic volatility adjustment can only be applied in internal models. Munich Re does not intend to apply the dynamic volatility adjustment.


GlossaryBackup

EEAoL Excess of assets over liabilities. Obtained by deducting total liabilities from total assets in the Solvency II balance

sheet.

Economic earnings Change in economic capital resources in the reporting period, adjusted for capital measures, especially dividend payouts and share buy-backs, as well as changes in other own funds items. Economic earnings are part of Profit and loss attribution.

Economic effects Changes in economic capital resources from development of capital market parameters on assets and liabilities. Assets and liabilities are measured consistent to SII balance sheet.

EOF Eligible own funds. Part of own funds eligible to cover Solvency capital requirements after consideration of potential limits from tiering; numerator of Solvency II capitalisation ratio.

Equivalence Solvency II includes provisions for assessment of the solvency regimes and systems of group supervision of countries outside the EU. The purpose of these assessments is to determine whether the regimes and systems assessed are equivalent to the comparable provisions of Solvency II.

ERC Economic risk capital: Based on Munich Re internal model: 175% times VaR 99.5%.

Expected returnexisting business

Risk-free interest on economic capital resources and unwind of risk margin.


GlossaryBackup

FFCIIF Credit institutions, investment firms, financial institutions, alternative investment fund managers, financial institutions.

Own funds for FCIIF and IORP are not part of BOF but EOF.

GGrandfathering Now referred to as „transitional arrangements“. Please see below.

G-SIIs Global systematically important insurers.

HHLA Higher loss absorbency: The higher loss absorbency requirement developed by IAIS will be a globally comparable

group capital requirement that applies to all global systemically important insurers (G-SIIs).

IICS International Capital Standards: The ICS is part of ComFrame and will apply to all internationally active insurance

groups (IAIGs) and G-SIIs.

IORP Institutions for occupational retirement provision: Own funds for FCIIF and IORP are not part of BOF but EOF.


GlossaryBackup

LLTG measures Long-term-guarantee measures: volatility adjustment, matching adjustment, transitional measures for the risk-free

interest rates and transitional measures for technical provisions.

MMatching adjustment (MA) Adjustment based on spread between interest rate of specific asset portfolio and risk-free interest rates in which asset

and liability cash flows are closely matched; Portfolio-specific – used to calculate best estimate of the respective liabilities.

M-Factor “M-Factor” reflects S&P’s view of the robustness of the insurer’s economic capital model.

NNew business value Value of new business (NBV) written in reporting period, valued at end of period, after capital costs.

Non-available own funds items Due to restrictions in fungibility and transferability (i.e. availability), certain own funds items of solo entities (e.g. surplus funds, subordinated liabilities, deferred tax assets) cannot be taken to cover the Group SCR. Such “non available own funds" may be included in the group own funds only up to the contribution of the related undertaking to the group SCR. Formerly those restrictions were covered within the calculation of SCR.


GlossaryBackup

OOperating variances existingbusiness

Experience variances and assumption changes; reflect positive or negative deviations from prior year’s business valuation.

Other valuation adjustments (AFR vs SII)

Various valuation differences between SII methodology and former AFR approach; e.g. transition to EIOPA yield curve, etc.

Other items approved Certain items in the SII balance sheet approved by the supervisor classify as BOF.

Other non-operating earnings Overall tax effect and other items.

Other operating variances Model changes, etc.

ORSA Own risk and solvency assessment: The ORSA can be defined as the entirety of the processes and procedures employed to identify, assess, monitor, manage, and report the short and long-term risks a (re)insurance undertaking faces or may face and to determine the own funds necessary to ensure that the undertaking’s overall solvency needs are met at all times over the planning time horizon.

PProfit and loss attribution (PLA) Analysis of changes in own funds: economic earnings, capital measures and change in other own funds items.

Reflection of risk and value drivers of major business units.

QQRT Quantitative Reporting Template.


GlossaryBackup

RRestrictions from tiering When calculating EOF, certain limits regarding the tiers have to be considered. The maximum limits regulate how much

capital of a specific tier is at least required to cover solvency requirements. If a limit is reached the entity has to deduct own funds of a specific tier. This is not applicable to Tier 1 unrestricted items. SII limits do currently not lead to deductions of own funds at Munich Re.

Ring-fenced funds (RFF) RFF have a reduced capacity to fully absorb losses on a going-concern basis due to their lack of transferability within an undertaking. Such items have to be deducted from solo own funds if they exceed the notional SCR of that RFF.

Risk Margin The risk margin is designed to represent the amount an insurance company would require to take on the obligations of a given insurance company on top of the best estimate of liabilities. It is calculated using a cost of capital approach.

SSolvency II balance sheet(SII B/S)

Assets and liabilities recognised and valued according to the regulations of the new Solvency II supervisory regime.

Solvency II capitalisation ratio (SII ratio)

Quotient of eligible own funds and solvency capital requirements.

Solvency capital requirements (SCR)

The amount of capital that insurers in the European Economic Area are required to hold. The solvency capital requirement is set at a level that ensures that insurers can meet their obligations over the following 12 months with a 99.5% probability (VaR99.5%).

Surplus funds Components of provision for premium refund (free RfB) considered as own funds, partially treated as non-available own funds item.


GlossaryBackup

TTechnical accounts Aggregate of all asset and liability SII balance sheet items relating to technical accounting: technical provisions

including best-estimate liability and risk margin, reinsurance recoverables, deposits, etc.

Transitional arrangements SII regulation allowing subordinated liabilities issued prior to 1.1.2016 to be included as own funds even if they do not comply with the general SII guidelines.

Transitionals The transitional measures for Solvency II are intended to ensure a smooth transition to meeting the full requirements (e.g. transitional measures for risk-free interest rates and technical provisions).

VValuation adjustments Difference in valuation of assets and liabilities under IFRS and SII (e.g. fair values in SII vs. amortised cost in IFRS).

Volatility adjustment (VA) Adjustment to the relevant risk-free interest rates based on the spread between interest rates of a reference asset portfolio and the risk-free interest rates.


Financial calendarBackup: Shareholder information

2016

4 February Preliminary key figures 2015 and renewals

16 March Balance sheet press conference for 2015 financial statementsAnalysts' conference in Munich with videocast

27 April Annual General Meeting 2016, ICM – International Congress Centre Munich

10 May Interim report as at 31 March 2016

9 August Interim report as at 30 June 2016

9 November Interim report as at 30 September 2016


For information, please contact

Christian Becker-HussongHead of Investor & Rating Agency RelationsTel.: +49 (89) 3891-3910E-mail: [email protected]

Thorsten DzubaTel.: +49 (89) 3891-8030E-mail: [email protected]

Christine FranzisziTel.: +49 (89) 3891-3875E-mail: [email protected]

Britta HambergerTel.: +49 (89) 3891-3504E-mail: [email protected]

Ralf KleinschrothTel.: +49 (89) 3891-4559E-mail: [email protected]

Andreas SilberhornTel.: +49 (89) 3891-3366E-mail: [email protected]

Angelika RingsTel.: +49 (211) 4937-7483E-mail: [email protected]

Andreas HoffmannTel.: +49 (211) 4937-1573E-mail: [email protected]

Ingrid GrunwaldTel.: +49 (89) 3891-3517E-mail: [email protected]

Münchener Rückversicherungs-Gesellschaft | Investor & Rating Agency Relations | Königinstraße 107 | 80802 München, GermanyFax: +49 (89) 3891-9888 | E-mail: [email protected] | Internet: www.munichre.com

INVESTOR RELATIONS TEAM

Backup: Shareholder information


Disclaimer

This presentation contains forward-looking statements that are based on current assumptions and forecasts of the management of Munich Re. Known and unknown risks, uncertainties and other factors could lead to material differences between the forward-looking statements given here and the actual development, in particular the results, financial situation and performance of our Company. The Company assumes no liability to update these forward-looking statements or make them conform with future events or developments.

briefing on solvency ii

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